Dollar Falls as Crude Prices Slide and Stocks Rebound

The dollar index (DXY00) fell from a 1.25-month high today and is down by -0.21%.  The dollar gave up overnight gains today and turned lower after crude oil prices retreated following reports that the US proposed a temporary waiver of sanctions on Iran’s oil.  Lower crude prices lower inflation expectations and are dovish for Fed policy and bearish for the dollar.  Also, stronger stock prices today reduced liquidity demand for the dollar.  The dollar recovered from its worst level today after the May NAHB housing market index unexpectedly strengthened.

The dollar initially moved higher today on increased safe-haven demand after President Trump said the “clock is ticking” on Iran and it “better get moving FAST on a peace deal, or there won’t be anything left of them.” Also, ramped-up geopolitical tensions boosted safe-haven demand for the dollar after Reuters reported that Pakistan has deployed 8,000 troops, a squadron of fighter jets, and an air defense system to Saudi Arabia as part of a mutual defense pact, a deployment described as a “substantial, combat-capable force” to support Saudi Arabia if it comes under further attack.

The US May NAHB housing market index rose +3 to 37, stronger than expectations of no change at 34.

Swaps markets are discounting the odds at 3% for a 25 bp rate cut at the next FOMC meeting on June 16-17.

EUR/USD (^EURUSD) rebounded from a 1.25-month low today and is up +0.15%.  Short covering emerged in the euro today after the dollar gave up an overnight advance and turned lower.  Also, today’s -1% decline in crude oil prices is positive for the Eurozone economy and the euro, as Europe imports most of its energy needs. 

Swaps are discounting an 86% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.

USD/JPY (^USDJPY) today is up by +0.09%.  The yen fell to a 2-week low against the dollar today after Japanese Prime Minister Sanae Takaichi said she has called on the finance ministry to compile a yen-negative supplementary budget to address rising commodity prices driven by the ongoing conflict in the Middle East.

The yen recovered from its worst level today when crude oil prices tumbled on reports that the US proposed a temporary waiver of sanctions on Iranian oil.  Also, lower T-note yields today are supportive of the yen.  In addition, higher Japanese government bond yields have strengthened the yen’s interest rate differentials as the 10-year JGB bond yield rose to a 29-year high of 2.807% today.

The markets are discounting a +78% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.

June COMEX gold (GCM26) today is up +7.40 (+0.16%), and July COMEX silver (SIN26) is up +0.213 (+0.27%).

Gold and silver prices erased early losses today and turned higher after a slump in crude oil prices sparked short covering in precious metals.  WTI crude oil fell from a 2-week high and slid more than -1% on reports that the US proposed temporarily waiving sanctions on Iranian crude oil.  Lower crude prices weigh on inflation expectations and may prompt central banks around the world to pursue easier monetary policies, a bullish factor for precious metals.  Today’s dollar weakness is also supportive of precious metals. In addition, precious metals have safe-haven support amid peace talks between the US and Iran that remain in limbo, which could lead to renewed hostilities in the Middle East. 

Precious metals prices today initially moved lower, with gold falling to a 7-week low and silver sliding to a 1.5-week low.  Today’s early jump in crude oil prices to a 2-week high boosted global bond yields and weighed on gold and silver prices.  Silver prices also came under pressure today amid weaker-than-expected Chinese economic news, which is negative for Chinese industrial metals demand. 

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 5.25-month low on March 31 after climbing to a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to a 9.25-month low on May 5 after rising to a 3.5-year high on December 23.

Strong central bank demand for gold is supportive of gold prices, following the most recent news that bullion held in China’s PBOC reserves rose by +260,000 ounces to 74.64 million troy ounces in April, the largest monthly increase in a year and the eighteenth consecutive month the PBOC has boosted its gold reserves.

Weaker-than-expected Chinese economic news is negative for industrial metals demand and silver prices. China Apr industrial production rose +4.1% y/y, weaker than expectations of +6.0% y/y.  Also, China Apr retail sales rose +0.2% y/y, weaker than expectations of +2.0% y/y.  In addition, China Apr new home prices fell -0.19% y/y, the thirty-fifth consecutive month that prices have declined.